7 Important Legal Requirements to Start a Franchise

If you have decided to buy out a franchise to start with a stable and proven business model, You must have realized that there is more to it. For starters, there are specific legal requirements to start a franchise that you need to meet. In this guide, you will learn about all the legal requirements that you need to start your venture. 

Understanding Franchise

To begin with, it’s important to understand what a franchise is. Franchise is a business model where the individual who is about to start a new business approaches a previously successful business to partner with them.

In this partnership, the person who intends to join the business is known as the franchisee, while the owner of the business is referred to as the franchisor. In a franchise, the franchisee pays the franchisor a fee in exchange for the rights to use their brand’s name, product, business model, and support system. The franchisor has the opportunity to grow its business, while the franchisee benefits from a proven business model and receives guidance for achieving success.

ALSO READ ABOUT Top 5 Pros and Cons of Franchising vs. Starting Your Own Business

But before you jump directly towards a franchise, make sure that you are familiar with the legal aspects of this game. 

Legal Requirements to Start a Franchise

1. Franchise Disclosure Document (FDD)

One of the first legal requirements to start a franchise is preparing a Franchise Disclosure Document. The Federal Trade Commission (FTC) requires franchisors to give this document to potential franchisees at least 14 days before moving forward with any agreement.

This document contains 23 necessary details about the franchise, including: 

• All the business’s experience, including its history and any legal matters. 
• Details about all the financial matters like initial cost, royalties, and everything that needs to be addressed. 
• Information about the responsibilities and duties of the franchisee towards the business. 
• Details whether the franchise will have exclusive rights to certain aspects of the business. 
• Financial stats that inform the franchisee about the company’s financial positions. 

Providing the FDD is a legal requirement to start a franchise in most countries, including the United States, Australia, France, and many others. It is obligatory because it ensures transparency between the franchisor and the franchisee, allowing both parties to understand the risks before joining hands. 

2. Registering the Franchise

In some countries and states, registering a franchise with relevant government authorities is one of the legal requirements to start a franchise. For instance, in the United States, various states require franchisors to register their FDD with the state’s regulatory authority. These states include Florida, Maryland, and Washington, among others.

For the registration process, the franchisor has to submit the FDD, pay the necessary fee, and some documents if required. Once the registration is completed, the franchise will be officially allowed to offer and sell franchises in that state. Failing to register, if required, can result in legal penalties or the suspension of franchise operations.

3. Local and Federal Laws

Compliance with local, state, and federal laws is another critical aspect of the legal requirements to start a franchise. This includes adhering to business laws, tax regulations, labor laws, and other legal obligations specific to the location where the franchise will operate. 

For example, if you’re opening a franchise in California, you’ll need to follow the Federal Trade Commission (FTC) rules, which govern the franchising industry. The FTC requires that all franchisors provide the FDD to potential franchisees and adhere to specific advertising and marketing rules. Also, you may need to comply with state-specific regulations, which can be different in every state.

4. Franchise Agreement

This is the main agreement that sets the tone of the business. The agreement establishes a legal relationship between the franchisee and the franchisor, setting the terms that both parties must follow. It specifies the duties and obligations of each side.

The franchise agreement typically includes details about the duration of the franchise, fees and payments, territory, training and support system, and rules and guidelines for maintaining the brand’s quality. 

5. Intellectual Property

Protecting intellectual property, such as trademarks, logos, and brand names, is also among the important legal requirements to start a franchise. It ensures that the franchise’s unique identity, business procedure, and trade secrets are safe. 

The franchisor has to register with the proper authorities to safeguard their intellectual property rights; in the US, it’s with the Patent and Trademark Office (USPTO). Registering with the Patent and Trademark Office (USPTO) protects your brand and allows you to take legal action if someone uses your business name or logo without permission.

6. Provide Training and Support

Training and support is not always a legal requirement, but it is often part of the agreement. This is to ensure that the franchisee follows the previously established business models and procedures to ensure consistency in maintaining the quality of products and services that the parent company has been offering for years. 

7. Licenses and Permits

Finally, obtaining all necessary business licenses and permits is a critical step in meeting the legal requirements to start a franchise. The type of licenses required vary based on the location, local regulations, and, most importantly, the type of business. 

Even though the franchisee would be operating under a known brand name, they’d still need to set up their own business entity and obtain all the necessary permits and licenses to operate legally in their area. Health permits, sales tax permits, and general business licenses are the most standard classes of licenses. 

Final Statement

Starting a franchise involves much more than just opening a new store; it requires careful planning, adherence to legal standards, and a solid understanding of the legal requirements to start a franchise.

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